Exam Revision Flashcards
TERP and Market Cap with Rights issue funding for a takeover
REMEMBER:
The rights issue is as normal, and so is TERP, however, and market cap changes to also minus the issue price.
Once the takeover happens, you add share price and shares paid for, minus the cash raised and the issue price
PE Ratio method
EPS* PE ratio will give you share price of the company
EAT*TE will give you total value
Post tax pre tax
If you’re given pre-tax Kd, finding the MV is the investors required return and therefore no tax on the interest, to find the weighting
However when calculating the WACC, this is for the company, and therefore you would put tax on the Kd, also on the LOAN value of a bank loan!!
Factors affecting investment in working capital policy
Nature of the industry and business
Liquidity vs profitability and overtrading
Credit policy of suppliers
Credit policy of the company
Length of the operating cycle
Supplier delivery certainty
Why NPV is superior
Considers cashflows - ROCE uses profit (can be manipulated)
NPV links directly to shareholder wealth - usese cash flows and is an absolute measure of return. Only method
NPV considers whole investment of the project - payback doesn’t - period after breakeven
NPV considers the time value of money. Value of money decreases and brings back to present day. However ROCE and IRR more easily understood. Discounted payback can be used
DVM growth method with no current dividend but has in future with growth rate after
Take say year 2 and year 3’s dividend, multiply it by the growth and discount back to present day (remember to compound)
Do the same for the year beyond e.g. Beyond year 3 and discount again but use the DVM growth method
Choosing between debt and equity finance
Traditional view - debt changes risk at high gearing
Debt considererd cheap, but also riskier due to repayments being required
Equity issue is second cheapest form
Tax exhaustion on debt
Using debt = agency issues restictions on dividend and charges on assets
Kd eventually rises at high risk
Bankruptcy risk
Borrowing collateral
Raising equity can be seen to dilute share price as often at a discount
Buying back bonds and issuing new bonds
Buying back bonds doesn’t change PBIT, issuing new bonds will do at the rate of return specified in the question. Both have interest implications
Business Valuations categories
Majority = DCF and PE
Minority = DVM
Asset stripping, property investment, capital heavy = asset based
Convertible debt compounding
Check convertible option total by:
No. of shares*share price (INCLUDE growth if there and COMPOUND)
Share price will be given to make convertible a better option
PE Ratio earnings growth
Remember the formula to add growth e.g Earnings1+gPE Ratio
